Riders on the Storm

The big banks are cer­tainly weath­er­ing this com­modi­ties slump bet­ter than those be­fore it. But can we say the same about the oil patch?


The big banks are weath­er­ing this com­modi­ties slump bet­ter than the slumps that came be­fore it. But can we say the same about the oil patch?


When oil prices tum­bled in late 2014, his oil­field ser­vices com­pany was well-po­si­tioned to weather the storm. He had ex­panded con­ser­va­tively dur­ing the boom, only buy­ing drilling rigs for his Cal­gary-based Lon­es­tar Direc­tional when he had the con­tracts to pay for them. As the bust wors­ened through 2015, loyal cus­tomers threw him as much busi­ness as they could, even if rates were much lower, forc­ing him to cut field wages in half. And his bank was very sup­port­ive, ap­pre­ci­at­ing his strong bal­ance sheet and will­ing­ness to cut costs dur­ing the down­turn. Waldal isn’t alone. “From the guys I’ve been talk­ing to, the banks have tried just about ev­ery­thing they can to give them hope,” he says. “But af­ter a few years, they even­tu­ally just said enough is enough and shut them down.” Oil­field busi­nesses, both pro­duc­ers and ser­vice com­pa­nies, might not have en­joyed as much lat­i­tude in pre­vi­ous down­turns.

“For ev­ery day or for ev­ery week or month that this re­ces­sion drags on, there are go­ing to be more and more cus­tomers that aren’t able to hold on any longer.”

This bust in the oil patch—and the im­pact on re­gional and na­tional fi­nan­cial in­sti­tu­tions—seems dif­fer­ent than those in the re­cent past, ac­cord­ing to Todd Hirsch, chief econ­o­mist for the Al­berta Trea­sury Branches (ATB), who calls the 1980s in Al­berta “a re­mark­able down­turn.” The mem­ory of Pierre Trudeau’s Na­tional En­ergy Pro­gram can still in­voke a strong re­ac­tion from those un­for­tu­nate enough to re­mem­ber the eco­nomic dev­as­ta­tion that ac­com­pa­nied it. Ar­ti­fi­cially low oil prices were com­pounded by in­ter­est rates ris­ing 20 per­cent, plus the pro­vin­cial economy was much smaller and less di­ver­si­fied, says Hirsch. “If you were a small busi­ness or house­hold fi­nanc­ing debt at 18 per­cent and sud­denly your rev­enue dropped through the floor, you had al­most no chance,” he says. “To­day, it’s much bet­ter.”

Peter Rout­ledge agrees. The man­ag­ing direc­tor of fi­nan­cial ser­vices for Na­tional Bank Fi­nan­cial says the mid-1980s saw “very high el­e­vated loan losses” in banks’ en­ergy port­fo­lios. “This cur­rent cy­cle has pro­duced losses that are maybe 10 per­cent to 20 per­cent of what we saw 30 years ago,” he says. “So it looks much more like what we saw in the 2007 through 2009 re­ces­sion. Very mild.” Rout­ledge has­tens to add that he means “mild” in its ef­fect on Cana­dian fi­nan­cial in­sti­tu­tions, not for the oil patch or con­sumers. Hirsch points out that the struc­ture of the na­tional fi­nan­cial sys­tem also helps be­cause the Big Five na­tional banks can spread their losses over big­ger port­fo­lios than, say, re­gional or lo­cal Amer­i­can banks.

One might ex­pect the two smaller Al­berta-based banks, ATB and Cana­dian Western Bank (CWB), to be feel­ing the pinch a bit more, but that doesn’t ap­pear to be the case. Chris Fowler, the pres­i­dent and CEO of Cana­dian Western, says its di­rect ex­po­sure to the en­ergy in­dus­try is “rel­a­tively small”—about 3 per­cent of the bank’s to­tal loans out­stand­ing. “This is com­prised of loans to ex­plo­ration and pro­duc­tion com­pa­nies rep­re­sent­ing ap­prox­i­mately one per cent and loans to en­ergy ser­vice com­pa­nies rep­re­sent­ing ap­prox­i­mately two per cent,” he says. Net im­paired loans within its en­ergy port­fo­lio at the end of the third-quar­ter were only $3 mil­lion, less than 0.02 per­cent of the bank’s over­all loan book.

One rea­son for such low loan losses is that banks are much more likely to have se­cured loans than dur­ing pre­vi­ous down­turns, ac­cord­ing to Rout­ledge. “The col­lat­eral for the ex­plo­ration and pro­duc­tion com­pa­nies tends to be min­er­als in the ground, which banks have tended to look at as sus­tain­ing its value,” he says. “So they’re be­ing pa­tient.”

Fowler says Cana­dian Western has taken a “proac­tive ap­proach” to re­solv­ing prob­lems and in­tends to “con­ser­va­tively man­age ex­po­sures” to en­ergy loans. “Nearly three-quar­ters of CWB’s di­rect ex­po­sure to ex­plo­ration and pro­duc­tion com­pa­nies is now com­prised of syn­di­cated loans to bor­row­ers with strong bal­ance sheets and sub­stan­tial proven, de­vel­oped, and pro­duc­ing re­sources.” Rout­ledge says all banks are doing

the same, work­ing with clients to cut costs and fund­ing ex­plo­ration for new re­serves. “If I look at it from a 50,000-foot per­spec­tive, they’ve been quite will­ing to work with their clients and wait and see where the oil price set­tles.”

Waldal says banks have the op­po­site prob­lem with ser­vice com­pa­nies be­cause equip­ment is worth al­most noth­ing in a de­pressed mar­ket. “There was a busi­ness that just went un­der and I’d known those guys for years. The bank put their as­sets up for sale and they ba­si­cally got, I think, it was five cents on the dol­lar, if they got that re­ally,” he says, adding that banks know “they’re in a pickle” and try harder to keep com­pa­nies op­er­at­ing in hopes of an up­turn in the price of oil. Fowler says his in­sti­tu­tion’s loans to ser­vice com­pa­nies are mostly termre­duc­ing ad­vances se­cured by in­dus­trial equip­ment, rather than op­er­at­ing lines of credit or loans se­cured against re­ceiv­ables or in­ven­tory. “These fac­tors mit­i­gate the loss po­ten­tial of CWB’s lim­ited ex­po­sures to the en­ergy ser­vices sec­tor,” he said. “To date, the im­pact of lower oil prices out­side of the di­rect oil and gas port­fo­lio has been min­i­mal.”

That could change in the months ahead. Mark Salkeld, pres­i­dent of the Pe­tro­leum Ser­vices As­so­ci­a­tion of Canada (PSAC), says his or­ga­ni­za­tion has lost a hun­dred mem­bers al­ready thanks to the down­turn. That num­ber in­cludes ma­jor hy­draulic frac­tur­ing ser­vice firm San­jel En­ergy Ser­vices, some of whose as­sets were sold into the Amer­i­can mar­ket. “The ser­vices sec­tor is be­ing dev­as­tated and the banks are sit­ting there hold­ing the books of a num­ber of com­pa­nies barely mak­ing ends meet,” he says. Oil and gas pro­duc­ers have driven rates down to the point that some com­pa­nies are work­ing at cost, or even less, just to keep staff em­ployed and cash flow­ing. All of Waldal’s staff have taken pay cuts and some are job-shar­ing just to hang on to a pay­check. The vet­eran driller thinks a re­turn to some level of nor­mal is prob­a­bly still a year away, and he won­ders how many ser­vice com­pa­nies can con­tinue hang­ing on by their fin­ger­tips.

Sur­pris­ingly, Al­berta con­sumers have fared bet­ter than ex­pected, ac­cord­ing to Hirsch. “Those sec­tors that are driven by the con­sumer—like re­tail, like the hous­ing mar­ket, like the res­tau­rant and bar in­dus­try—we haven’t re­ally seen a big drop and it’s quite amaz­ing, ac­tu­ally.” For in­stance, he notes that Cal­gary hous­ing prices “wob­bled,” drop­ping three to four per cent, but low mort­gage rates min­i­mized the im­pact, un­like in the mid-1980s when prices dropped 25 per­cent. Hirsch chalks some of the re­silience up to the na­ture of oil and gas lay­offs this time around, es­pe­cially in Cal­gary, where more high salary pro­fes­sion­als like engi­neers and man­agers lost their jobs, but re­ceived sig­nif­i­cant sev­er­ance pack­ages. “I don’t want to im­ply that it hasn’t been a hor­ri­ble ex­pe­ri­ence for them, but a lot of the un­em­ploy­ment is con­cen­trated among high-in­come earn­ers and they haven’t re­ally yet had to ad­just their con­sumer pat­terns all that much,” he says. “For ev­ery day or for ev­ery week or month that this re­ces­sion drags on, there are go­ing to be more and more cus­tomers that aren’t able to hold on any longer,” he con­tin­ues. “The longer this drags on, the more pain we’re go­ing to see for the fi­nan­cial in­sti­tu­tions.” CIBC, for in­stance, said in its sec­ond-quar­ter an­a­lyst call that it has $40 bil­lion of re­tail ex­po­sure in Saskatchewan and Al­berta, with the lat­ter ac­count­ing for $31 bil­lion. Credit cards and un­se­cured per­sonal lend­ing delin­quen­cies had been trend­ing up, mainly driven by the oil-pro­duc­ing prov­inces, he says. Even though that trend had plateaued, CIBC ex­pected them to re­main el­e­vated.

The next 12 to 18 months are likely a good news/bad news sce­nario for fi­nan­cial in­sti­tu­tions ser­vic­ing Al­berta. Hirsch ex­pects oil prices to re­cover to the $50 to $55 per bar­rel range late this year, enough to sta­bi­lize the pe­tro­leum sec­tor, but not enough to stop fur­ther de­te­ri­o­ra­tion of the la­bor mar­ket, where un­em­ploy­ment crept up to 8.4 per­cent by Oc­to­ber. “I think the oil and gas chal­lenge for the banks is in the rearview mir­ror,” says Rout­ledge, but cau­tions that there is still plenty of op­por­tu­nity for prices to slump again, cre­at­ing a “dou­ble dip” in the en­ergy economy and more prob­lems for lenders. Salkeld says that even af­ter prices stay above $50 per bar­rel for an ex­tended pe­riod, oil and gas pro­duc­ers will do ev­ery­thing within their power to use the ad­di­tional rev­enue to shore up their own bal­ance sheets be­fore they be­gin ac­cept­ing higher rates from ser­vice com­pa­nies. “Once things do pick up, the banks and in­vestors are go­ing to be there to col­lect their money back,” says the PSAC head. “Then, af­ter banks and in­vestors are sat­is­fied, they might have some rev­enue to start hir­ing peo­ple.” Waldal says he’s an op­ti­mistic per­son by na­ture, but adds that he’s been in the oil patch too long to ex­pect that good times are just around the next corner. “Some of these com­pa­nies that have gone un­der, we’ve been lucky enough to pick up some of that work,” he says. “I guess one man’s mis­for­tune is an­other man’s good luck. We’ve been on the good side this time, but I’ve been on the bad side far too of­ten.”

“The ser­vices sec­tor is be­ing dev­as­tated and the banks are sit­ting there hold­ing the books of a num­ber of com­pa­nies barely mak­ing ends meet.”

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